Banks Remain Wary of NBFC Lending Despite RBI's Risk Weight Reduction
The NBFC sector in India continues to struggle with bank funding despite RBI's risk weight reduction. Bank lending to NBFCs grew only 2.60% in the first four months of the fiscal year, down from 12.70% last year. NBFCs' share in total bank credit decreased to 8.50% from 9.10%. Banks are particularly cautious about smaller NBFCs in microfinance and unsecured loans. Larger NBFCs are turning to capital markets and offshore borrowings, with external commercial borrowings reaching $61 billion, of which NBFCs account for 43%.
*this image is generated using AI for illustrative purposes only.
The non-banking financial company (NBFC) sector in India continues to face challenges in securing bank funding, despite recent regulatory changes aimed at easing lending conditions. The Reserve Bank of India's (RBI) decision to restore risk weights on NBFC loans to 100% from 125% has not yet translated into increased lending from banks to NBFCs.
Sluggish Growth in Bank Lending to NBFCs
In the first four months of the current fiscal year, lending to NBFCs grew by a mere 2.60%, marking a significant decline from the 12.70% growth observed in the same period a year earlier. This slowdown indicates a persistent cautious approach by banks towards NBFC lending.
Declining Share of NBFCs in Bank Credit
The share of NBFCs in total bank credit has seen a noticeable decrease:
| Date | Share |
|---|---|
| July | 8.50% |
| July | 9.10% |
The outstanding credit to NBFCs stood at ₹15.70 lakh crore as of July.
Banks' Selective Approach
Banks are particularly cautious about smaller NBFCs, especially those with substantial exposures to:
- Microfinance
- Unsecured loans
This selective approach suggests a risk-averse strategy by banks in their lending practices towards NBFCs.
Alternative Funding Sources for Larger NBFCs
In response to the tightening bank credit, larger NBFCs are increasingly turning to alternative funding sources:
- Capital markets
- Offshore borrowings
These alternatives are being pursued for potentially cheaper funding options.
Surge in External Commercial Borrowings
External commercial borrowings (ECBs) have seen a significant uptick:
- Record $61.00 billion in ECBs
- NBFCs' share in ECBs: 43.00%
This represents a substantial increase from the 20-37% average observed over the past five years.
Implications for the NBFC Sector
The current scenario presents both challenges and opportunities for the NBFC sector:
- Funding Diversification: Larger NBFCs are successfully tapping into diverse funding sources, potentially reducing their dependence on bank credit.
- Pressure on Smaller NBFCs: Smaller NBFCs, particularly those in microfinance and unsecured lending, may face increased pressure due to limited access to bank funding.
- Evolving Financial Landscape: The shift towards capital markets and offshore borrowings could lead to a more diverse and resilient funding structure for the NBFC sector as a whole.
As the situation continues to evolve, it remains to be seen how these trends will impact the overall health and growth of the NBFC sector in India.
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